Warning signals

Disappointing start to Q3 corporate results

Up till now, there was little clarity about the impact of the government’s demonetisation move. But initial corporate results for the third quarter point to a clear negative impact. The key culprit, as many had expected, was lacklustre demand, which made corporates struggle for profits. It is not a minor blip either: A sample of 160 companies indicates that profits have grown at the slowest rate in the past 10 quarters. Although this is a small sample, yet it contains leaders across several sectors, including seven Nifty companies. Of course, some sectors are under-represented and a fuller picture will emerge as other results are reported. For instance, even though sales of automobiles have been dismal, company financials are not available just yet. Similarly, cement and construction companies have also not declared their results yet. But it is unlikely that the broader picture is too dissimilar from what this sample suggests. 

To be sure, performance was buoyed by global factors. Crude oil prices strengthened, enabling growth for Reliance Industries. The industrial chemicals sector also saw improved profitability as the commodity cycle trended up. The US dollar strengthened, and IT companies generated reasonable results. Overall, this sample of 160 listed companies logged sales worth Rs 2.26 lakh crore in Q3 of the current financial year and this is 9.9 per cent higher than the corresponding quarter of 2015-16. The sales growth is reasonable, and at first glance, it would imply that demand was not affected too adversely. However, without Reliance, sales growth dropped to 6.3 per cent. Operating profits for all companies (profits before depreciation, interest and taxes, or PBDIT) rose by 4.7 per cent while net profits were up 1.2 per cent. Adjusted for extraordinary items, profits were flat, rising only 0.1 per cent. The seven Nifty companies together delivered 2.3 per cent growth in net profits. If Reliance is excluded, year-on-year (YoY) profit actually declined by 1.2 per cent. If the IT sector is excluded, YoY profit dropped by 6.2 per cent. 

Banks and non-banking financial companies (NBFCs) are of special interest. There were windfall capital gains for banks as treasury yields dropped. But credit demand was hit and non-performing assets (NPAs) surged. Private sector banks did well with improved profitability and marginal non-performing assets deterioration. Housing finance majors, such as LIC Housing, registered double-digit growth in profits and sales. But public sector banks, such as Canara Bank, saw a serious deterioration in NPAs. Credit growth was very low at under six per cent for a sample of 10 banks. Overall, profits were down by 23.5 per cent for this sample. There are concerns that many public sector banks, which have not yet declared results, could be hit hard on the NPA front. Treasury yields, too, have stabilised, ruling out future windfall gains. FMCGs saw 7.5 per cent decline in net profits. In fact, no FMCG registered double-digit growth so far. 

One ray of hope is that supply chains do not seem to have been disrupted though there has clearly been a slowdown. It is hard to predict how long will it take for consumption demand to recover. One can only hope that the Budget will take steps to encourage a rebound in consumption and kick-start the investment cycle.